Reporting from AAFA: Will We Have a Deal with China?
At the outset of a presentation about technology and disruption at this year’s American Apparel & Footwear Association’s (AAFA) Executive Summit, Kurt Cavano, sporting a beard he started growing when he stepped down a few months ago as the head of the company he founded originally as TradeCard (now Infor Nexus), shared this quote from Bill Gates: “We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next ten. Don't let yourself be lulled into inaction.”
It’s an interesting and true statement. And it’s not just true for technology adoption, or business in general. Taking the long view is good for interpersonal relationships, environmental developments, college planning, child rearing, landscaping, city planning, nation building and just about anything you can think of.
Cavano spoke about some of the fascinating ways in which we can expect technology to change our world in the coming years, such as how the GPU (graphical processing unit) contrasts with the chip in that instead of doing many things at once, it allows you to do one thing really fast — 8,000 trillion transactions per second — and how transformative this is for areas such as artificial intelligence (AI). He spoke about how this GPU computing power, plus AI advancements, plus the large amount of investment money seeking growth businesses will leave our world looking entirely different. Already, there are cobots (collaborative robots) training and working alongside people; soon self-driving cars will talk to each other; visual AI is changing the way we shop (think Amazon Go), allowing for gesture recognition.
In the same way that the internet and faster chips and smartphones have made the world ‘smaller’ and more connected, these advancements, too, will draw the world even closer together. So there’s a bit of cognitive dissonance that comes along with observing the changes coming about as a result of the rapid advances in technology and hearing about the large-scale projects at the gargantuan Chinese conglomerates JD.com and Alibaba.com from their executives — who also spoke at the Summit — while also hearing from the front lines about the giant and ongoing mess that is the trade war with China. On the one hand, the world is getting faster and more connected, and on the other, artificially imposed barriers are flying up that are harming our ability to connect effectively.
‘Tariffs don’t work’
There is concern across the board that the long-term effects of the tariffs and trade war with China will be devastating to apparel, as well as to many other U.S. industries. Supply chains and relationships that have taken years to forge and improve are being destroyed in far less time than they took to put together. “We’re damaging a supply chain was built to handle product safety, human rights, the environment, and sustainability,” and it’s being taken apart by the combination of actual tariffs and even more by the uncertainty of what is to come, said Rick Helfenbein, president and CEO of the AAFA (pictured in photo above).
The fact is that “tariffs don’t work,” said Helfenbein, citing tariffs imposed in the ‘30s that were designed to protect apparel and footwear manufacturers in the United States. Yet today, 97 percent of apparel and 98 percent of footwear are imported, with 41 percent of apparel and 72 percent of footwear coming into the United States from China. (If you’re wondering where some of that 2 percent of Made-in-the-USA footwear is coming from, one place you can look is to New Balance, which operates five factories in the U.S. Northeast. Speaking at the Summit, New Balance chief product supply officer Dave Wheeler said that the company recently was awarded a $17 million contract to make the 950v2 athletic shoe for 92,000 military troops. “Striving to make some product in the U.S. is good,” he said.)
Meanwhile, the trade war is taking a toll on supply chains, with “China flight” — meaning apparel companies pulling their sourcing from China and moving it to nearby Asian countries or elsewhere — higher than Helfenbein had expected, which he attributed to concerns by public companies drummed up by analysts inquiring about their exposure in that country.
If you think about this scenario in light of the Gates comment above, there’s a connection that can be drawn from the inability to anticipate how things will play out, and the inaction (or sometimes less-than-ideal action) that can follow as a result. Limbo is not a good place to be, unsettled trade disputes make it difficult to look out two years as well as 10; Trump has now twice extended the deadline for a deal with China, and the industry has been collectively holding its breath.
Things do look hopeful for a trade deal. In February, President Trump delayed an increase in tariffs that was set to take effect that week, at that time citing “substantial progress” on issues including IP and technology transfer. Today, U.S. Treasury Secretary Steven Mnuchin and U.S. Trade Representative Robert Lighthizer, during a two-day visit to Beijing, will work toward a final deal, and next week a delegation of government officials from China is scheduled to come to Washington for additional talks.
In looking back to his comments at last year’s Summit, Helfenbein noted that his concerns vis a vis a trade war with China had been well founded. “I said, ‘If you are in apparel, fashion or accessories — watch out,’” but he also noted that to date, the industry had only been “nibbled at the fringes” in areas such as bags and leather and never got “hit on the head” even as Trump imposed $250 billion worth of tariffs. He credited that to efforts on behalf of the industry by the AAFA, which included “more op-eds written than you can imagine” by the AAFA’s executive vice president Steven Lamar and by a series of carefully crafted TV appearances — geared specifically to reach President Trump on his favorite news programs — in which Helfenbein essentially warned the Administration to “stay away.”
That campaign, which received 1 billion impressions worldwide, carefully walked a line between explaining the toll that higher tariffs on consumer products would exact and avoiding targeting any specific person or organization, which Helfenbein realized made an impact when he visited the office of the United States Trade Representative (USTR) and thanked them for paying attention to the industry, to which they replied, “Thank you for not calling us out on TV.”
Issues to hammer out
When it comes to the great debate over a trade deal between Washington and Beijing, there’s a lot at stake, and multiple pieces to evaluate. In the end, though, anything that the United States and China sign, if they do, is meaningful only if Beijing decides to actually do what the document says, and that is the central point at the heart of all discussions around this topic.
So where does it stand, and will we have a deal? Wendy Cutler, vice president and managing director, Asia Society Policy Institute, thinks we will, and that it will require some breakthroughs including certain market access for the United States into China, as well as some structural reforms. High on the list of demands from the United States are provisions for protecting IP and eliminating forced transfers of U.S. technology, and negotiations will also have to determine whether or not and how these provisions are enforceable, she said. There’s also a lot on the line from an image perspective, with the Administration setting high expectations for outcomes, and an election looming in the near future.
“I think people will ask, ‘Was it worth the trade war, and the effects the tariffs and retaliation had on U.S. companies, workers and consumers?’ We suffered a lot of consequences,” says Cutler, “and when people look at this deal, they’ll ask, ‘Was it worth it?’"
John Murphy, senior vice president, international policy, U.S. Chamber of Commerce, agreed. For many companies across the nation the tariffs have been detrimental (although of course this is not true for all companies — there are always beneficiaries of any situation). That’s on display at thewrongapproach.com, a website the chamber created that gives a state-by-state view into how tariffs are inflicting harm on the American economy (tagline: Trade Works. Tariffs Don’t). “Fingers crossed we’re getting to a point where there’s a workable deal,” said Murphy.
So, what does a workable deal look like and what are the underlying issues? On the one hand there’s China, which is coming to the table holding what it views as a long and painful history of submitting to Western powers in what its news media refers to as a “century of humiliation” that started with what it calls the “unequal treaties” of the 19th century, after the first Opium War, when Great Britain, trying to resolve its huge trade imbalance with China (it was buying lots of silk and tea; China was buying virtually nothing) started smuggling opium into China. That created irresistible demand, eventually leading to war that concluded with the Treaty of Nanking, which gave Britain control of Hong Kong. That’s not ancient history. Hong Kong only just reverted back to Chinese hands in July 1997. And Nanking was just the first of many treaties that China sees as having subverted China’s culture and opportunity while favoring foreign businesses and nations.
In recent years, China has worked to reverse these trends. Xi Jinping, general secretary of the Community Party, in his inaugural speech in 2013 spoke of the Chinese dream, and the great rejuvenation of the Chinese nation, said former CNN foreign correspondent Andrew Stevens, speaking at the Summit. “JinPing wants to reclaim China’s rightful place in world order. He has put action to those words … and is making strategic inroads around the world,” he says. JinPing has the support of his party around him, which has enshrined “Xi Thought” on socialism. His position is so solid that after just five years in his position he consolidated power and put himself in charge for life. “He is the most powerful leader since Mao Tse Tung,” says Stevens.
“Previously it was the mantra of the leadership to hide their strength and buy time. Xi is the opposite. He is a man in a hurry. He’s a nationalist. His father was a founding member of the [Communist] Party and he was educated on a diet of deep grievances on how China has been treated by the West.”
JinPing is moving to reverse all of that. Toward the end of 2018 he set forth a “Made in China 2025” industrial strategy that focuses on building up sectors seen to be key to China’s technological and economic progress that is essentially a “sweeping blueprint” for putting China first in areas ranging from AI to robotics, says Stevens. With this as its goal, China is unlikely to stop supporting these sectors with subsidies and other support.
Then there’s the United States and President Trump, who for years has viewed China as taking advantage of the United States by stealing U.S. intellectual property and forcing technology transfer, and also by subsidizing its own companies and thus giving them the ability to compete unfairly with U.S.-made products: the United States buys more than $500 billion in Chinese-made products annually vs. just under $130 billion in U.S. goods purchased by China.
Trump has for years consistently hammered the issue of unfair trade. Think back to 1987, when he took out an ad “railing against Japan” on this issue, says Helfenbein, who also remembers being on the golf course with Trump, in 2002, where he expressed frustration that “China was taking our jobs;” on the campaign trail, in 2016, he promised to impose tariffs on China of 47 percent. “The man has been true to his word,” says Helfenbein.
So we’ve got two countries butting heads. Those technologies that Cavano was talking about, well, both countries want to set their nations up to compete and take the lead.
Will we have a deal with China?
The negotiators on this trade deal really have their work cut out for them, on multiple fronts. Centuries of history, strong personalities, fear regarding global power shifts, and actual points of clear disagreement.
At this point in negotiations, one of the biggest hurdles comes down to enforcement, and how to ensure that China actually follows through in areas such as opening its economy and respecting IP rights and technology ownership. Cutler sees movement on some key points, including a new law in China that no longer requires forced tech transfer as well as a shift in attitude toward IP that is reflective of China’s own self-interest, she said, noting: “I think China is at the point where it’s in their own interest to set up a strong IP regime.” Still, she acknowledged, it’s difficult to come up with transparency and enforcement mechanisms, which could include the re-imposition of tariffs if China does not comply with rules as laid out. When it comes to lifting tariffs, Cutler favors a plan of doing so gradually over time as China complies with whatever deal is hammered out vs. lifting them all initially and then having to reimpose them in what’s referred to as a “snap back.”
As they work to agree on trade terms, negotiators are also are dealing with issues that are somewhat unique to this Administration vis a vis the uncertainty that President Trump throws into the process with his unpredictable behavior that at times compromises efforts by others, she says.
In a career of seeing many unique negotiations, this one may take the cake. For one thing, she says, the time frame has been extremely short in terms of addressing all of the particular issues necessary. Also, says Cutler, she has been struck by the “top down” nature of this process — with President Trump at the top — and how he has undercut Cabinet members and others working on behalf of the United States by at times overturning what they have negotiated, and doing so very publicly. “One can argue that the President’s unpredictability, including how he treats his Cabinet members, could contribute to success, but I think it could be the opposite. If you have reservations, you [should] express them privately,” said Cutler, adding, “As a negotiator one of the worst things is to be discredited.” It limits your ability to accomplish anything, because the parties on the other side don’t trust that you have the power to do what you say.
The next several weeks should be the final stretch, with which country the deal favors “coming down to who is most desperate,” says Stevens. In the past five months, both countries’ economies have been suffering, although China’s slowing growth is attributable to its deleveraging process, not the trade war, he says, and while in 2007, 37 percent of China’s economy was exports, today that is just 20 percent, which makes the trade deal less of a pressing issue for China.
“I think JinPing can get the economy going [without a trade deal]. Beijing has a lot of tools. In 2009 it threw a lot of money at the economy, which created the debt it has today. It doesn’t want to do that again, but there are other tools it can use to stabilize the economy. That doesn’t mean China won’t deal, but everything points toward Trump wanting the deal more, especially given the political fallout that will result from continued tariffs going into the election season.”
Ultimately, says Stevens, “we are looking at some sort of a deal. The trade war in some form is coming to an end. Unlike Brexit, if the U.S. and China don’t work out a deal, the whole world suffers,” he says.
Jordan K. Speer is editor in chief of Apparel. She can be reached at [email protected]